Many people considering student loan consolidation as a financial aid option often have the following questions. So I am going to make a few posts answering these questions in case you may be wondering about them.
This post contains answers to general questions for student loan consolidation as an option for affording college, and my next posts will be specifically for private and federal student loan consolidation.
General Student Loan Consolidation FAQ’s:
1. Do I need a minimum balance in loans to consolidate?
This depends on the student loan provider. For private student consolidation loans and federal student consolidation loans through FFELP, you will usually need $5,000 to $7,500 in loans to be able to consolidate. However, through the Federal Direct Student Consolidation Loan Program, you are not required to have a minimum balance.
2. Will student loan consolidation affect my credit rating?
Unless you go out of your way to not keep up with your payments or default on your student loans, student loan consolidation should only help improve your credit rating (if you are making your payments on time). Education debt is often referred to as a “good debt”, as it represents an investment that usually allows you to earn more money to repay your debt. Student loan consolidation may increase the loan term, but it usually doesn’t change one’s repayment behavior. In fact, it should help them to improve their payment behavior, as making monthly payments is now easier.
3. How should I go about consolidating my loans?
Although you are allowed to consolidate with any lender (unless you are doing a direct student loan), you should first talk with the current holder of your student loans before making a decision to switch. Since they already have all of your paperwork, the process of consolidating with them will be easier, if you decide that you like their student loan consolidation program the most. Doing this will also establish standards that you can compare other student lenders against (i.e. seeing who has better customer service, loan discounts, etc.). Also note that completing a student consolidation loan application takes about thirty minutes, so the paperwork isn’t too much even if you decide to choose another lender.
You should also continue making payments on your current student loans until you are notified that the consolidator has paid off your original loans. This will ensure that you don’t default on the original student loans; that would be bad, since it would prevent your consolidation loan application from moving forward.
4. Can I save money through consolidation?
Although you probably won’t be able to save any money on the actual amount you owe for the student loan, by shopping around you might be able to find a lower interest rate that what your current student loan interest rates our. The government only sets a maximum interest rate on student loans, and many lenders charge lower rates and also offer student loan discounts (for things such as having your monthly loan payments automatically taken out of your bank account). You also can get more interest rate reductions for making on-time payments for a period of time like 36 months (be aware though, that if you are late with just one payment, you will permanently lose this discount opportunity).
I would advise focusing on the discounts that you can’t lose, such as discounts for direct debit of your monthly payment. For discounts requiring on-time payments, search for the ones that require a shorter time period of on-time payments before you are eligible for the discount.
While you won’t actually save money on the student loan itself, the amount you could save in interest by shopping around could amount of to thousands!
5. Can parents consolidate PLUS loans? Is this a good idea?
Yes, you can consolidate PLUS loans. Doing this also allows some extra savings, as it reduces the interest rate from 8.5% to 8.25% on the PLUS student loan (due to the cap on student consolidation loan interest rates). However, you should also consider the impact of student loan consolidation on student loan discounts that are available.
6. If I only have one loan can I still consolidate?
You may consolidate just one student loan, as long as it is not a consolidation loan. If that is the case, you must include additional student loans.
7. Can I reconsolidate my student consolidation loans?
Yes, you are allowed to if you are adding more student loans to the consolidation. For a federal student consolidation loan, you cannot re-consolidate if you do not have more federal student loans to include. Also note that reconsolidating a student consolidation loan will NOT relock the interest rates on the loan.
8. Can I consolidate my loans before I graduate?
No. You can only consolidate during the grace period of your student loans, after they enter repayment, or if you drop below half time enrollment status. Summer enrollment and accelerated programs usually won’t qualify you for student loan consolidation either.
9. I have qualified for a 2.25% discount on a Stafford Loan (.25% interest rate reduction for direct debit and another 2% for making consistent on time payments) that I have not consolidated yet. Will I lose these benefits for consolidating? Should I do it?
If you consolidate your current student loans, you will lose any existing loan discounts (such as the ones you mentioned).
To decide if this is a good idea, compare the value of the student loan discounts you will get by consolidating to the student loan discounts that you currently have.
10. Can I consolidate my Federal and private student loans together?
Private student loans cannot be consolidated into the Federal Student Loan Consolidation program. However, many private lenders allow you to consolidate federal student loans into their private student loan consolidation program. However, this is not recommended, as it will usually increase the interest rate, and mean that you lose many of the benefits that come with federal student loans. You can keep these benefits by consolidating your federal student loans separately from your private ones.
Information for this post obtained from http://www.finaid.org/loans/consolidationfaq.phtml
Jan 10, 2009
